Economists warn of possible 2009-10 Canada deficit

TORONTO, Oct 15 (Reuters) - The dust had barely settled on Tuesday’s Canadian election when economists and a prominent business group said the newly returned Conservative government may need to adjust course to avert a possible budget deficit next year.

The Canadian Chamber of Commerce urged Prime Minister Stephen Harper on Wednesday to give a fiscal update as soon as possible because the global economic outlook has worsened in recent weeks.

Harper said in Calgary, Alberta, that he plans to summon politicians back to work this autumn and will present an economic and fiscal update before the end of November.

“The sooner it can be done, the better, because clearly economic conditions have changed substantially since the budget in the spring,” Chamber of Commerce President Perrin Beatty told Reuters.

Commodity prices have slumped and weaker U.S. demand for goods will hurt Canada’s export-oriented economy, while the higher cost of credit and financial market volatility will dampen domestic spending, the chamber noted in a letter sent to Harper.

“The ability of the government to meet its commitments may be compromised by an economy that will show little or no growth over the next year, constraining government revenues,” the chamber said.

“The affordability and timing of commitments will need to be reexamined to avoid risking a deficit next year.”

During the election campaign, Finance Minister Jim Flaherty said he expects a budget surplus of at least C$3 billion ($2.5 billion) in the 2008-09 fiscal year.

While the government should be able to eke out a small fiscal surplus in the current year, its plan for a surplus next year “is at serious risk,” Dale Orr, chief Canadian economist at research firm Global Insight, wrote in an article on Wednesday. Orr suggested the government identify spending that can be postponed.

Merrill Lynch Canada chief economist David Wolf agreed that a small surplus looks likely this fiscal year, due to better results in the first half, “but next year looks awful”.

Wolf’s economic forecast is for a deficit of C$10 billion in fiscal 2009-10, “assuming no change in policy”.

The government could avoid a deficit by raising taxes or cutting spending, but those would put pressure on an already weak economy, Wolf said.

“We don’t know how the Conservatives will confront the looming fiscal hole, or what the opposition will be willing to support,” he wrote.

Craig Wright, chief economist at Royal Bank of Canada, told a business luncheon in Ottawa that his team forecasts neither a Canadian recession nor a budget deficit. But if growth surprises on the weak side, Wright said he would not recommend avoiding a deficit at all costs.

“If we were to be pushed into a deficit because the economy is weak, I wouldn’t think we should panic and try to fight that off (by raising taxes) at the cost of more significant downturn to the economy,” Wright said.

Their musings about fiscal pressures come as the Canadian government considers how to keep the country’s financial system stable and competitive while governments elsewhere are propping up their weaker banking sectors.

Ottawa should consider several actions on top of measures already taken to ease effects of the credit crisis, the Chamber of Commerce said in its letter.

The Bank of Canada should provide further short-term interest rate relief by cutting its overnight rate by half a percentage point on Oct. 21, its next scheduled announcement date, the chamber said.

Other measures could include creating a commercial paper and bankers’ acceptances funding facility, as the U.S. Federal Reserve has done, and insuring all bank deposits, regardless of size, “to boost confidence and remain competitive,” it said.

The Canada Deposit Insurance Corporation, which is funded by levies on banks, insures deposits up to C$100,000. ($1=$1.19 Canadian) (Additional reporting by Louise Egan in Ottawa; Editing by Peter Galloway)